The IRS is providing the worst level of service in its history

Kitty Miv, Editor05 March, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

It's little wonder that the United States Internal Revenue Service is providing the worst level of service in its history – well, that is, since such things began to be measured at any rate, which was actually only 14 years ago. You only need to look at the additional responsibilities successive administrations have piled onto the much-maligned IRS. It's no longer merely a revenue agency, but is also a welfare agency and an enforcement agency, besides other things. President Obama has been especially guilty of expanding the IRS's remit, primarily with his health care reforms. Obamacare makes more than 40 changes to the Internal Revenue Code in its quest to raise money to pay for the structural changes to the US health care system and to provide the subsidies for individuals that the legislation is meant to protect. Given that the Code is now said to stretch to more than 5,000 pages, this sounds like an insignificant number. But Obamacare has only just begun, and already we are seeing evidence that the IRS isn't coping at all well with the additional workload, having sent incorrect information to an estimated 800,000 taxpayers who purchased health insurance on the federal health marketplace. Indeed, about one-half of those taxpayers who received an overpayment of the tax credit, due to miscalculations by the IRS, have already paid some of it back. And it's not as if the agency doesn't have form: about one-quarter of all Earned Income Tax Credit payments made in the 2013 fiscal year were paid in error, according to a recent report by the Treasury Inspector General for Tax Administration. That's a USD14.5bn mistake. Some, like National Taxpayer Advocate Nina E Olson, say that the IRS's failings are a result of underfunding. I'm inclined to agree. But at the same time, merely throwing more money at the agency is not the solution. The IRS now has a budget of just short of USD11bn and a staff roster the size of a small city, despite recent reductions in personnel. Maybe it's time to downsize this jack-of-all-trades to what it does best: collect taxes. That said, the US is by no means the only country with a supercharged tax department; more and more governments are using their revenue agencies to roll out new welfare systems. So I don't hold out much hope of this happening any time soon.

Where I come from, handling stolen goods is a crime, punishable in severe cases by serious jail time. Governments, however, are increasingly proving themselves to be above the law, especially in relation to this particular offense. I refer here to the report that France will allow the United Kingdom to share data stolen from a bank by an ex-employee. And yes – you've guessed it – the medium in question contained the details of people who used the services of a particular bank allegedly to avoid tax. Doubtless the more well-heeled and high-profile clients will be named and shamed into paying back taxes and more. "Serves them right," you might say. But hang on a minute. Suppose I broke into my neighbor's house when he was out because I suspected he was up to no good. Do you think I'd be given a pat on the back or even a reward by the authorities when I present them with the evidence? No, I don't think so either. Two wrongs don't make a right in my book. However, when it comes to tax avoidance, it's as if all sense of proportionality gets thrown out of the window as politicians and liberal commentators whip themselves up into a frenzy of righteous indignation against tax-dodging fat cats. Nobody seems to question where the information came from, or how the authorities came by it, or how much they paid the perpetrator of the leak. It's almost incentivizing people to break data protection and privacy laws. It doesn't say much for the claims of governments that our data will be safe and secure when it's transmitted from pillar to post under automatic information exchange.

It was no surprise when South Africa's Minister of Finance, Nhlanhla Nene, announced an increase in personal income tax in the 2015 Budget. But it could have been a lot worse. Many observers had predicted that the Government would increase value-added tax, or even corporate tax, to address a budget deficit that is threatening to become structural. Doubtless the devil will be in the detail. And the phrase "the Government is to take further steps to combat revenue leakages through erosion of the tax base, profit shifting, and illicit money flows" shows that beneath the more eye-catching measures to help small businesses, a series of complex revenue raisers lurk that will keep the midnight oil burning in many a corporate tax department. There's no getting away from the fact, though, that the Government needs revenue and the Budget therefore raises tax rather than cuts it. And this isn't just a one-off event either. South Africa's economy is slowing, and despite a huge increase in the country's tax base over the last 20 years or so, taxes simply can't keep pace with spending. The current administration's ability to manage the economy, as well as its own finances, must be being called into question by some foreign investors. Let's not forget that foreign investment will also have a substantial role to play in poverty reduction and South Africa's future prosperity.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 146th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as - 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to - 1, and another one in week six, dropping to - 2; finally in week 13 it got something right, so it went back up to - 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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